Unearned revenue is best described as:

• A. Revenue earned before cash is collected; recorded as a liability until cash is received.
• B. Cash received before performance; initially recorded as a liability; revenue recognized when the performance obligation is satisfied.
• C. An asset representing future revenue; recognized as revenue when billed.
• D. Revenue recognized immediately upon receipt of cash, regardless of performance.

Answer: (B)

Unearned revenue happens when you collect cash before you’ve delivered goods or completed a service. That money isn’t revenue yet because the earning process isn’t finished, so it sits as a liability—the company owes the customer the promised goods or services.

As you fulfill the obligation, you reduce that liability and recognize the revenue. For example, if a customer pays for a one-year subscription upfront, you record cash received as a liability at first, and each month you recognize part of the revenue as you provide the service.

Why the other descriptions don’t fit: describing revenue as earned before delivering and treating it as a liability until cash is received would imply revenue can be earned without delivering, which clashes with the idea that the obligation hasn’t been satisfied. Saying it’s an asset representing future revenue would mix up unearned revenue with prepaid or receivable assets. Recognizing revenue immediately when cash is received, regardless of performance, ignores the requirement to satisfy the performance obligation before revenue is earned. The correct concept is cash collected before performance, recorded as a liability, with revenue recognized only when the obligation is fulfilled.